Understanding The Different Types of Business Loans

Understanding The Different Types of Business Loans

There is a boatload of reasons why a business venture may need funding, and there is a good deal of financing options available to accomplish it. Although having many options can be favorable, they could quickly overwhelm you. That’s why it's crucial to research before choosing the right type of business loan. Otherwise, you might be waiting months to secure the funds or end up with an unfavorable offer. Below are the common types of business loans you need to know.

Personal Loans

Yes, personal loans can be used for business use, but not all lenders allow them. Those trying to get their business off the ground may consider taking out a personal loan because approval depends on their personal credit.

Note that loan amounts on this type of loan are usually smaller than what you can secure with other options. The maximum amount you can borrow might be subject to your personal DTI ratio.

You can take out a personal loan from an online lender, credit union, or a bank. Choose a lender that has no restrictions against using a personal loan to fund your business and has a simple application process, for example, CreditNinja. Do you know that is not a credit union but an online lender?

Equipment Financing

Equipment financing can be an excellent solution if you need money to buy machinery or equipment. But here’s the catch: the apparatus you acquire will serve as collateral for the loan.

So, if you fail to repay the loan, the lender can seize and sell the equipment to recover the losses. Since the collateral’s presence lowers the investment risk of the lender, you can nail down competitive and affordable interest rates.

Working Capital Loans

A working capital loan can help cover the day-to-day costs of business operations. This type of loan can work with all kinds of businesses that require access to wealth until revenue bounces back in the future. Traditional financial institutions and some online lenders usually offer these short-term and small business loans.

Invoice Factoring

If your business promotes a service or product to other establishments and uses invoices to amass payments, it may qualify for invoice factoring. You might need to sell your business’s B2B invoices to a third party.

There are two types of invoice factoring: non-recourse and recourse factoring agreements. Non-recourse factoring agreements mean the factoring company bears the majority of the risk of defaulting customers. On the other hand, recourse factoring agreements mean your business must purchase back any unpaid invoice.

Business Lines of Credit

A business line of credit works like a credit card to a certain level.

The bank that issued the credit card to the customer approves a credit limit. And as you borrow money on it and repay what you owe, you can use the same credit line over the draw period.

Once the draw period expires, you won’t be able to access that same credit line again. Then, the repayment period starts, which lasts up to five years.

Term Loans

Term loans are perfect for those who want to invest in a particular business venture or require working capital. With this type of loan, you borrow money upfront and repay the loan on a set repayment schedule with interest. Online lenders and banks generally offer term loans.

The provisions of term loans vary, but a qualified business may:

  • Use the borrowed amount for different purposes
  • Secure repayment terms of at least ten years
  • Borrow at least $500,000

SBA Loans

These government-backed business loans are perfect for business owners with excellent credit. The U.S. SBA does not generally offer business loans. However, it somewhat guarantees business loans that lenders and banks offer to small businesses.

By guaranteeing the business loan, some risks are eliminated, making them the most affordable and competitive sources of capital. Three of the most renowned SBA loans include:

  • SBA Microloans. This SBA loan can help businesses pay for equipment, purchase inventory, and meet working capital needs.
  • SBA 504 Loans. This SBA loan can help your business acquire real estate or equipment.
  • SBA 7(a) Loans. This SBA loan is perfect for expanding your business, acquiring an existing company, or securing working capital.

Final Thoughts

There are various types of business loans available out there, and the best fit for your business comes down to many different factors. Ultimately, each business loan is aimed at a different business need. With that said, you will need to consider your reason for borrowing the loan, the length of time your business is operating, your business finances, and your credit.

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